House of Commons - Work and Pensions

Select Committee on Work and Pensions Fourth Report

4 Parents on benefits

175. One of the key proposals of the White Paper is the repeal of Section 6 of the Child Support Act 1991, which compels parents with care to apply to the CSA if they claim Income Support or income-based Jobseeker's Allowance.[190] This change is scheduled to happen from 2008. The proposal had originally been made by Sir David Henshaw on the basis of reducing the administrative burden on C-MEC,[191] and was generally welcomed in much of the evidence received.[192]

176. However, some reservations were expressed; while acknowledging the administrative benefits of removing compulsion, Citizens Advice stated:

"We are concerned […] that many parents on low incomes will not be in a position to agree a sustainable voluntary arrangement, because the separation is not amicable, because the former partner is no longer around, because his actual income is not transparent or agreed, and because promised payments do not materialise. It is understandable that any new system replacing the CSA will want to try to minimise its caseload in order to guarantee its own effectiveness - but this will only prove to be a viable approach if parents are genuinely able and willing to make private arrangements. The availability of good quality advice, including face-to-face advice as well as websites and other information, will be critical if the government's strategy is to stand any chance of success."[193]

177. Parents with care on benefit currently make up 70% of the intake of new applications to the CSA, although in terms of the Agency's total live caseload they account for less than 40% of cases.[194] On the basis of these figures it is possible to calculate in broad terms that, once compulsion is removed, there will be a significant group of parents with care on benefit, numbering up to 556,000, for whom it is unclear what will happen in terms of their child maintenance arrangements.[195] The Secretary of State commented in supplementary written evidence that:

"There are significant behavioural uncertainties which make precise estimates of behaviour once section 6 is removed particularly difficult. The impact will depend on a number of factors such as how attractive it will be for future benefit claimants to make a maintenance agreement and how much support and encouragement they will receive to make an agreement (both of which depend on the level of the maintenance disregard and how targeted the information and guidance services provided are). It also depends on how many of this client group can be supported to opt for a private agreement. As Sir David recommends, we are doing detailed modelling work to assess the most likely impact but at this point we do not have a specific estimate.

In general though we do expect fewer parents with care to use the Child Maintenance Enforcement Commission (C-MEC) as a result of removing the requirement that all parents with care claiming benefits are treated as applying for child maintenance. Although less benefit parents with care are expected to use C-MEC, we expect those who do use it to be more likely to be assessed as having a positive maintenance amount and maintenance be paid. We aim to ensure that those who choose not to use C-MEC are supported to make private arrangements rather than letting such parents drop out of the maintenance system altogether."[196]

178. A reduction in C-MEC's caseload from the removal of compulsion appears to be assumed by the Government and there are (as yet) no obvious safeguards to protect vulnerable parents with care who may end up without any maintenance arrangement. The Secretary of State noted in oral evidence that if there is one specific lesson the Government should have learned from the last 15 years of CSA operations, it is that "if you rush these reforms you get them wrong."[197]

179. Therefore, in a case where outcomes and effects are unclear, the Committee is very concerned about the moral hazard which may be created if section 6 is abolished, by allowing non-resident parents to avoid their parenting responsibilities and by leaving parents with care on benefits. We would urge the Government to research whether similar simplification and operational savings could be achieved, and the moral hazard avoided, through a minimum lower limit where maintenance amounts below a very low level are not pursued because the benefits are too small and the costs too great. We also recommend piloting the removal of the requirement for parents with care on benefit to use C-MEC in order to analyse the effect it will have on them and on C-MEC's caseload and resources. If the Government does remove compulsion nationally in 2008, appropriate safeguards must be installed to protect vulnerable parents with care on benefit. The Government should also be prepared for the effect such a move will have in the short term on increasing the burden on C-MEC's resources as parents with care look for advice on their child support options.

Benefits disregard

180. The "benefits disregard" (also known as the Child Maintenance Premium) is the amount of child maintenance received by parents with care that they are entitled to keep without a corresponding fall in their benefit entitlements (Income Support or income-based Jobseeker's Allowance). It is currently set at £10 per week for all parents with care on benefit (where maintenance is being paid) whose cases began after the 2003 reforms. Under the old scheme rules (pre-3 March 2003 cases), all of the maintenance paid by non-resident parents goes to the state to offset the benefit cost.[198]

181. The White Paper states that the £10 disregard will be extended to all cases by 2008. Furthermore, the level of the disregard will be "significantly" increased from 2010/11.[199]

CHILD POVERTY EFFECTS

182. In her report on child poverty commissioned by the DWP, Lisa Harker recommended that "reforms to the child support system should aim to achieve the maximum impact on child poverty and, to this end, a significantly higher disregard of maintenance income in benefit calculations should be introduced."[200]

183. Sir David Henshaw also highlighted the positive impact any increase in the maintenance disregard would have on child poverty (because it increases money flowing directly to the parent with care), estimating that a full disregard would lift between 80,000 and 90,000 additional children out of poverty.[201]

184. The Government estimates that extending the £10 disregard to all cases will benefit 44,000 parents with care and 55,000 children, while the "significant" increase in 2010/11 will "mean that more maintenance paid flows directly to parents with care and will lift many children out of poverty."[202] A recent Parliamentary Question also provided poverty reduction estimates based on the disregard being set at varying levels:[203]

"Mr Plaskitt: The number of children lifted out of poverty and cost of increasing the levels of the child maintenance disregard in income support, Jobseekers Allowance, housing benefit and council tax benefit in 2009-10 are shown in the following table:

Figure 7

Level of disregard Number of children lifted out of poverty Cost in extra benefit expenditure (£ million)

£20 n/a 50

£30 30,000 - 40,000 100

£40 40,000 - 50,000 140

£50 50,000 - 60,000 170

n/a = not available

Notes: 1. Number of children lifted out of poverty is defined here as the number of children in households lifted above 60% of equivalised median household income before housing costs by increasing the level of the disregard. 2. Estimates provided are indicative and should only be used to give some idea of scale, since there is uncertainty over future distributions of earnings and maintenance receipts, and figures are sensitive to the assumptions used and drawn from a sample of data. 3. Figures for the number of children lifted out of poverty by a £20 disregard are not available due to a small sample size. 4. Poverty figures are based on analysis of 2004-05 Family Resources Survey and are rounded to the nearest 10,000. 5. Costs are calculated to the nearest £10 million and are based upon a combination of DWP administrative and survey data.

185. The Secretary of State, when questioned as to why the "significant" increase would not occur until 2010/11, cited the need to legislate, the successful extension of the £10 disregard, and the need to carry out further research into incentive effects and the cost to the taxpayer as the primary reasons.[204]

186. However, the issue of delaying the "significant" increase was a common theme in the evidence the Committee received; Professor Stephen McKay stated:

"I do not see the reason why it needs to be delayed […] You can argue about the amount of it, but I think there is no reason why it should not be doubled, tripled and done very quickly, and I think most people would support that."[205]

187. In written evidence, both CPAG and One Parent Families noted the anomaly that the extension of the disregard "significantly" would only be implemented in 2010/11 after the Government's interim Child Poverty Target had passed.[206]

188. Janet Allbeson from One Parent Families stated that there could be further implications for child poverty from not introducing the "significantly" higher disregard until 2010/11 but removing the compulsion to use the system for parents with care on benefit in 2008 (and the implied effect this could have on increasing the number of parents with care who are lost from the system altogether - see paras 175-179 of this report). She pointed out that the Government in "the White Paper itself acknowledges that £10 will not be enough to act as an incentive to parents on benefit to make maintenance arrangements."[207]

189. Oral evidence received from CPAG suggested that the poverty reduction projections made by Sir David Henshaw and the DWP would be dependent on a full pass-through of the disregard; something that does not currently happen. Dr Dornan also talked about the positive impact any increase would have on giving non-resident parents incentives to comply:

"If a non-resident parent can see the money getting through, not simply resulting in lost benefit, there is a greater incentive to comply. I think that needs to be considered as well. Beyond the stuff that you can model and produce a hard number for, you need to consider the extent to which this reduces the depth of poverty for other families and also the extent to which it supports other aspects of policy, in particular tax credits and welfare for work by increasing the stability of people's income."[208]

WORK INCENTIVES

190. The primary reason for not introducing a full (or extremely high) disregard relates to the incentive to work. The White Paper states that:

"The balance between the effects on incentives to work will need to be considered alongside the impact on administrative burdens and the potential contributions of different rates to addressing poverty directly. We will undertake further analysis of these issues in the coming months."[209]

191. The Secretary of State, in oral evidence admitted that he "[did] not think there is any evidence" to support the argument that a high or full disregard would disincentivise lone parents to work, but "there is instinct and there is impulse but we have to find a way through over the next year or so and come to a view about the definitive figure."[210]

192. A recent research report published by the DWP found that there had only been two studies which looked at the work incentive effects of the benefit disregard.[211] A UK study published in 2000 using data from 1997 found that a £5 increase in the disregard "appeared" to lead to an increase of one percentage point in the proportion of people not in work. However, the authors identified a number of limitations in their analysis (notably that there was likely to be bias in the estimates due to the methodology used).[212] In contrast, the second study, published in 2003 using evidence from the USA, found that increasing the level of the disregard had no adverse effect on employment rates. However, the DWP report concluded that due to the different nature of the UK and US benefit systems, this result may not be directly relevant to the UK.[213]

193. Some of the evidence received by the Committee suggested that the effect of a higher disregard on the incentive to work may be overestimated. Mavis Maclean believed that "in the past the job-seeking behaviour of lone parents has not been well enough understood, and I think the impact of a small amount of money is not as powerful as people might think."[214] CPAG dismissed the work incentive argument and instead called for a full disregard:

"We understand Government has concerns over the work incentive effects of increasing out of work income and intends further examination of this issue. We note that both the Henshaw review itself argued that the work incentives effect in practice is small, whilst the child poverty reduction effect is large. Since parents with care are more likely to be in work if maintenance is stable, and maintenance is itself more likely to be stable if non-resident parents see it reaching their children, there is a strong argument to increase the disregard precisely to facilitate moves into work […] We urge the Committee to reject the work disincentive argument and call for a full disregard of child maintenance."[215]

194. One Parent Families also noted that the majority of lone parents want to work and that a disregard could make this easier:

"One of the things that all the research shows that lone parents want is some kind of security; they want some sort of reliability. They worry about taking that step into work. If they know they have maintenance on-stream - they have applied for it and it is flowing - it makes it a lot easier to contemplate that move, because as well as your earnings and your tax credits (which you have to wait for) and your housing benefit that has got to be adjusted, you will know - a bit like Child Benefit - that you will be able to carry with you into work child maintenance. So in some ways it makes that "dipping your toe in" a lot easier."[216]

LEVEL OF "SIGNIFICANT" INCREASE

195. Because the Government wishes to carry out more research on the effect on the incentive to work, it has not yet announced the level to which the disregard will be "significantly" increased.[217] As outlined above, the majority of those who gave evidence welcomed the proposal to increase the disregard although there was no consensus about the ideal level. Professor Stephen McKay suspected that a £40 disregard would be very similar to a full one as very few non-resident parents would be paying more that this level of maintenance:

"Once the disregard got to about £40 a week, the number actually getting more money would be relatively small. So I think, as long as it goes up substantially, whether it goes up to £40 or is a complete pass through is not going to make a huge amount of difference […] the number of people that affects is relatively small. So, I think a much larger disregard is operationally very similar to a complete disregard."[218]

The latest CSA statistics show that, in December 2006, 24% of all assessments under both the existing schemes were for £40.01 or more per week.[219]

196. The Secretary of State also noted that the potential cost to the taxpayer was a significant issue:

"We have got to get this right. There is a cost to the taxpayer too in this. The costs of a £50 maintenance disregard are £170 million. This is cost and it has to be factored into it. We are doing some more work."[220]

In supplementary written evidence, the Secretary of State said that the equivalent cost for a full disregard would be £200 million.[221]

197. The Committee welcomes the Government's commitment to increase "significantly" the maintenance disregard for parents with care on benefit. On the basis of the evidence we have seen, we believe that a full disregard would be a desirable, but bold, step, especially in relation to the achievement of the Government's child poverty targets. However, given the potential cost to the taxpayer, any action should be preceded by a thorough assessment of the potential positive and negative impact on work incentives of different levels and types of benefit disregard, including percentage withdrawals instead of fixed £ amounts and the effects of annual uprating in line with prices or earnings. It should also include a proper cost-benefit analysis, and we call on the Government to publish and act on its results promptly.[222]

Payments for non-resident parents on benefit

198. Another proposal in the White Paper is to increase the flat rate of maintenance paid by most non-resident parents on benefits from £5 to £7 a week by 2010.[223] The flat rate was introduced following the 2003 reforms to the CSA, as well as a nil rate which applies to non-resident parents who fall into certain categories, such as a student in full-time education or where their income is less than £5 (£7) a week. The primary argument outlined in the White Paper for this payment is that it is based on the responsibility of a non-resident parent to contribute to their child's upbringing regardless (apart from a few cases) of their own income. The Secretary of State affirmed his belief in this principle:

"My view is that the right decision to make here is to send a very clear signal to everyone that, "Your relationship has ended but your financial responsibilities are never going to end until your children reach the age of 18 or leave higher education". Personally, I think if we were to depart from that we would be fundamentally torpedoing something that is incredibly important here that we should never lose sight of, which is the financial responsibility [for] kids."[224]

199. Professor Stephen McKay was critical of this aspect of the proposal, commenting:

"Taking £7 from benefit recipients means taking money from one of the poorest groups in society in order to marginally offset the poverty of another poor group. This is particularly punitive given that single people receive just about the lowest amounts of anyone receiving benefits (especially those under 25: £45.50 a week)."[225]

200. Table 2 of his submission, reproduced below, displays benefit rates (income-based Jobseeker's Allowance, Income Support and child tax credits) for a single non-resident parent and a lone parent with care with one child; it shows that parents with care are clearly badly off, but (even with just one child) have double the income of single non-resident parents before child support is paid.

Figure 8: Incomes where both NRPs and PWC are out of work

Age NRP income PWC income Ratio of incomes Money difference

Before child support

18-24 years £45.50 £119.28 2.6 £73.78

25-59 years £57.45 £119.28 2.1 £61.83

After £7 child support is paid

18-24 years £38.50 £126.28 3.3 £87.78

25-59 years £50.45 £126.28 2.5 £75.83

Source: Professor McKay's evidence. Note: Non-working NRP and non-working PWC, 1 relevant child with PWC. In practice, costs of housing and Council Tax are also likely to be met.

201. Citizens Advice was concerned about the enforcement of such payments:

"Our initial reaction is to wonder how effective it is to enforce payment of £5 or £7 from benefit income, and whether parents on benefit will pay this sum out of benefit incomes which may be as low as £54 per week."[226]

202. Dr Paul Dornan from CPAG expressed concern about the size of the increase:

"That is a 40% increase. Income Support I think over the same period has gone up by about 5%."[227]

He also said "if you compare income support rates to the poverty line, you would find that they are below the poverty line. If you decrease it further through the £5 or £7 charge, then you worsen the poverty for some very poor non-resident parents."[228]

203. Indeed, if the £5 payment had been index-linked to inflation since the level was first set in 2000, it would now be approximately £6.10 based on the Retail Price Index or £5.60 based on the Consumer Price Index.[229] Upon questioning regarding the size of the increase, the Secretary of State said "[it] is a modest and small amount; it has not increased in value since 2000. Putting it to £7 by 2010 will only just basically keep that £5 equivalent in proportionate value."[230] However, put in the context of the figures in figure 8 above the Committee believes that a non-resident parent on benefit may not see an additional £2 as a modest amount.

204. From an administrative perspective, some evidence received suggests that there may be significant savings from eliminating the £5/£7 payment and instead making nil assessments for non-resident parents on the prescribed benefits.[231] When questioned about this, Stephen Geraghty stated that:

"… it is certainly true that it costs us quite a bit to move small amounts of money around but - the but is - if we had a claim and the father is on benefit today we would still have the cost of processing the claim and then tracking him to see when he goes in and out on work."[232]

205. The Committee recommends that the Government should reassess the increase in the size of the flat rate payment for non-resident parents on benefit and it should instead be index-linked to inflation. The Committee also recommend further research is carried out into the effect this payment has on poverty among non-resident parents and their families and indeed on the work load of CSA and C-MEC; if there is found to be a significant negative impact, the Government should consider abolishing this payment and introducing nil assessments for non-resident parents on prescribed benefits.

190 White Paper, paras 2.4-7 Back

191 Henshaw Report, para 25 Back

192 See, for example, Q 123 Back

193 Ev 112 Back

194 Q 151 Back

195 House of Commons Library estimates based on administrative data for current CSA caseloads in December 2006. This figure represents 40% of the current CSA caseload. Back

196 Ev 121 Back

197 Q 208 Back

198 The reason not all cases are entitled to benefit disregard is that pre-2003 cases are administered by a different system which (until now) was not compatible with the introduction of a disregard. Back

199 White Paper p 31 Back

200 DWP, Delivering on Child Poverty: what would it take? A report for the Department for Work and Pensions by Lisa Harker, November 2006, p 58 Back

201 Henshaw Report, paras 23-24 Back